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On 17 May 2018 the Hamburg Regional Court ruled on the admissibility of a lawsuit without prior mediation proceedings where the parties had included a mediation clause in the franchise agreement (334 O 14/18). The court opined that the plea of prior mandatory mediation constituted a breach of good faith against the particular circumstances of the case.

This decision may be generally understood to have solidified the first franchise-related court judgment on bad faith regarding mediation clauses rendered by the Saarbruecken Higher Regional Court on 29 April 2015 (2 U 31/14).

However, at second glance, the Hamburg judgment provides a different reasoning for bad faith regarding a mediation objection and might therefore serve as a new application of bad faith in future franchise-related court proceedings regarding mediation clauses.

Facts

The claimant, a franchisor of fitness centre concepts, had concluded a franchise agreement with its franchisee, the respondent, that contained a mediation clause.

According to the clause, all disputes arising between the franchisor and franchisee regarding the rights and obligations under the franchise agreement were to be settled amicably. The claimant and the respondent agreed to make serious efforts to settle any disputes for a minimum period of at least two months, if necessary by consulting a mediator.

Further, resorting to the courts would be prohibited before settlement discussions and mediation had failed. The mediator was required to conduct mediation proceedings within one month. If no amicable settlement could be reached within this period or the mediator proclaimed the mediation to have failed, referral to the ordinary courts would be admissible.

Following the conclusion of the franchise agreement, the respondent did not fulfill payment obligations and, by lawyer's correspondence, requested information on the business figures of the franchise system, which it believed to be wrong.

In response, the claimant blocked the respondent's access to the franchise system's internet platform and, by pointing to the agreed mediation clause, suggested to conduct mediation proceedings. The claimant also proposed a mediator and requested the respondent's consent. In response, the respondent terminated the franchise agreement for a good cause.

In this correspondence the claimant referred, among other things, to the proposed mediation process. A mediation process was not conducted before the lawsuit was filed by the claimant. Therefore, the respondent considered the lawsuit to be inadmissible on the grounds that, contrary to the mediation clause, the mandatory mediation process had not been conducted prior to litigation.

Hamburg Regional Court decision

The Hamburg Regional Court favoured the claimant and held that the claim was admissible. The court ruled that the claimant was not obliged to conduct mediation proceedings before the lawsuit. Although the mediation clause had stated that mediation was mandatory before litigation and the respondent had objected to the complaint regarding the mediation clause, the respondent's plea was dismissed under the requirements of good faith (Section 242 of the German Civil Code).

Against the background of the parties' pre-judicial correspondence in which the claimant had repeatedly referred the respondent to mediation and the respondent had neither reacted nor indicated any interest in mediation proceedings, the court found that the conditions for a promising mediation procedure – being a constructive cooperation characterised by mutual trust and the common intention of an amicable settlement – were not met. Under those circumstances the claimant's assignment of a mediator was considered pointless and could not reasonably be requested as a condition precedent to any court proceeding.

According to the court, the respondent's conduct could be interpreted to mean only that the objection of prior mediation served the sole purpose of excluding the admissibility of the claims put forward by the claimant. This conduct was characterised as bad faith under Section 242 of the German Civil Code.

Saarbruecken Higher Regional Court decision

In its 29 April 2015 ruling the Saarbruecken Higher Regional Court had also found that the conditions for a promising mediation procedure were not met. However, the Saarbruecken court's reasoning differed from that of the Hamburg court.

Prior to the Saarbruecken court proceedings the parties had conducted a couple of weeks of intensive settlement negotiations; however, a settlement was not reached. Therefore, the court found that the conditions for a promising mediation procedure were not met and excluded the respondent's plea of prior mediation as bad faith.

Comment

The Hamburg Regional Court's judgment is particularly important as it concerns the rarely highlighted application of mediation clauses in franchise systems.

Surprisingly, given that the German Franchise Association (Deutscher Franchiseverband) offers guidelines for mediation and an online form for mediation requests and the British Franchise Association has provided mediation schemes since 2001, the Hamburg court's judgment is only the second decision to deal with the admissibility of complaints despite an effective mediation clause.

While the Hamburg court's ruling is not the first of its kind, its strong message to the franchise world should not be underestimated. Further, as it follows the Saarbruecken Higher Regional Court's decision and explicitly refers to its reasoning, it may be interpreted as having solidified the earlier ruling. The latest decision suggests that the earlier judgment is already being considered as a precedent rather than a standalone decision.

Beyond that, the Hamburg court's judgment provided a different reasoning for bad faith with regard to the mediation objection and might therefore serve as a new application of bad faith in future franchise-related court proceedings regarding mediation clauses. Future mediation pleas may not only be dismissed on grounds of bad faith if the parties' settlement negotiations ended unsuccessful, but also if one party fails to react to the other's repeated references to mediation.

While it makes sense to dismiss the mediation objection on grounds of bad faith where one party fails to react to the other party's repeated references to mediation, one may challenge that the conditions for a promising mediation were not met where previous settlement negotiations have ultimately failed. According to principles of alternative dispute resolution, negotiation and mediation are two vastly different techniques of dispute settlement. Therefore, the failure of one method may not generally presuppose the failure of the other. Mediation is a means of structured negotiation, which is guided and instructed by the mediator as an independent third party. The main difference between mediation and pre-judicial settlement negotiations lies in the assistance of a neutral, impartial and unbiased third party and the higher degree of procedural structuring.

In this light, it remains to be seen whether the procedural difference between settlement negotiations and mediation might be further evaluated in future court decisions on the admissibility of complaints in cases where mediation clauses have been agreed.

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